Electing Boards of Directors
Sent: Monday, September 09, 2002 6:49 PM
Subject: Electing Boards of Directors (4-461)
Honorable Mr. Harvey Pitt:
It is time that to stop allowing public corporations to conduct
board of director elections in the same way as has been the case
for many years. Reportedly, SEC Rule 14a-(8)(i)(8) specifically
allows public corporations to exclude director nominations from
shareholders.
In essence, most hurdles to engaging in an effective proxy
solicitation effort occur because the name of Shareholders'
Director-nominees will NOT appear on a corporation's ballot.
Under applicable state corporate law, Shareholders can easily
nominate a candidate for a corporate Directorship, but, under
present SEC Rules, only the names of those persons nominated by
the corporation need appear on the corporation's ballot. The
assets of all Shareholders are expended by Management to
distribute those ballots.
To overcome the hurdles, a Shareholder can expect to expend about
$250,000 to purchase the expertise to accomplish the task or
needs to develop that expertise. Normally, Shareholders must:
- locate other potential Director nominees and conduct related
due diligence;
- draft a charter for a committee;
- decide how to finance/allocate the out-of-pocket expenses,
e.g., legal document drafting, printing and distribution
costs;
- obtain a copy of the corporation's Bylaw and Articles of
Incorporation;
- learn details of state corporate law, federal securities laws
and various SEC Rules;
- learn how to use the SEC's EDGAR electronic filing system (as
there is no paper filing);
- deal with the corporation and its transfer agent which stall
and request thousands of dollars for a copy of the
Shareholders list which costs them little to produce;
- be willing to file a legal action in Delaware or other state
courts to get the Shareholders list;
- be prepared to expend funds and effort in defense of a
frivolous legal action by the corporation used to exhaust
funds and energies;
- deal with the SEC's responses to draft filings;
- make sure that the appropriate parties are notified that the
election is "contested";
- verify that proxy statements have actually been mailed to
"beneficial holders" of the stock and that votes have been
counted properly;
- locate and attempt to communicate with the Proxy Voter at
large Institutional Investors;
- learn the rules to be employed at the Annual Meeting without
the cooperation of the corporation.
The SEC is well aware of the aforesaid hurdles. The Division of
Corporation Finance, responded to recent correspondence from Les
Greenberg by stating, "[W]e remain sensitive to the importance of
this issue to shareholders, particularly in view of the
difficulty minority shareholders may have in seeking the election
of their nominees to the board of directors." Yet, the SEC has
done little to demonstrate any such sensitivity.
Some shareholders have discussed hurdles of nominating/electing
truly "independent" Directors --- those not beholden to
Management or fellow Directors for their selection, nomination
and/or the financing of their proxy solicitation efforts. Most
public investors were shocked to learn how Directors are
selected/elected. The general investing public does not think
about such issues. However, when awakened to the issue, investor
confidence in corporate governance tends to decline.
CONCLUSION
The Wall Street Journal (7/16/02), in an article entitled, "Wall
Street Rushes Toward Washington, Flees Responsibility," stated,
"Ms. Teslik [Council of Institutional Investors] cites how
difficult it is for shareholders to elect a director other than
those hand-picked by management --- even though the directors, in
theory, represent the shareholders. 'Our system allows executives
to pick the boards who are supposed to police them,' she says."
The Los Angeles Times (7/22/02), in a series entitled, "Crisis In
Corporate America," stated, "'The biggest obstacle to a good
board is arrogance,' Raber [Roger Raber, president of the
National Assn. of Corporate Directors] said. 'With some
directors, there is a sense of entitlement. ... "I'm here as long
as I want to be."'"
TIME Magazine (7/22/02), in an article entitled, "More Reform and
Less Hot Air," stated, "Get Rid of Pet-Rock Boards ... [T]oo many
corporate boards of directors still serve as little more than
puppets of management. ... Companies should be required to give
shareholders election materials about rival candidates; as it
stands, small investors who want to wage upstart campaigns don't
stand a chance."
The New York Times (7/30/02), in an article entitled, "Labor to
Press for Changes in Corporate Governance," stated, "He [John J.
Sweeney, President of the A.F.L.-C.I.O.] will also call for
changes to give pension funds more power to choose directors who
do not rubber-stamp the decisions of company executives."
TIME Magazine (8/5/02), in an article entitled, "Interview - 10
Questions for Ralph Nader," states, "Congress passed a corporate
accountability act last week. Was that enough? ... The election
of corporate board members is a Kremlin type of election. It's a
self-perpetuating system, with shareholders having no real power.
That has not been touched."
Entrenched Managers and Directors will only improve corporate
governance when they can be held personally accountable, e.g.
voted out of office and replaced by candidates nominated by
Shareholders.
We urge the SEC to consider taking the steps to improve "Open
Election" procedures as soon as possible. Perhaps appropriate
will be a method comparable to the election of the Board of
Overseers at Harvard -- or comparable plans wherein there are
more qualified candidates than open posts
[http://www.news.harvard.edu/gazette/2002/07.18/03-
overseers.html].
I understand that there have been viable new rules proposed:
http://www.corpgov.net/forums/commentary/SEC%20Petition%20G&M.htm
lhttp://www.corpgov.net/forums/commentary/SEC%20Petition%20G&M.html
Respectfully submitted,
David S. Searles, Jr.
CRT Trust Advisors, Inc.
400 Embassy Row, Suite 500, Atlanta, GA 30328